The point to remember abut expenses is that they are incurred as part of your delivery of the service to the client and as such are liable to VAT, regardless of whether or not the original bill was VAT exclusive, inclusive or from Norway. Assuming you're UK based, you total up everything you've spent for the client, including your fees, and bill them the total plus 20%.
The argument about VAT on VAT is a nonsense, this is just the agency being stupid. However, if they insist, you can charge the cost less VAT rather than have a fight about it. If you work the sums out you don't actually lose anything, even under flat rate (Although if you have a large VAT element routinely, flat rate is not perhaps the best option)
However what you are not doing is taking off the VAT, you are merely deciding to charge a discounted rate for that element of your service.
The argument about VAT on VAT is a nonsense, this is just the agency being stupid. However, if they insist, you can charge the cost less VAT rather than have a fight about it. If you work the sums out you don't actually lose anything, even under flat rate (Although if you have a large VAT element routinely, flat rate is not perhaps the best option)
However what you are not doing is taking off the VAT, you are merely deciding to charge a discounted rate for that element of your service.
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